Question

Case (3) Data concerning manufacturing overhead for a Saudi Company are presented below. The Mixing Department is a cost center. An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that 50% of supervisory costs are controllable at the department level. The flexible budget formula and the cost and activity for the months of July and Augustre as follows Flexible Budget Per Actual Costs and Activity Direct Labor Hour July August Direct labor hours 6.000 7,000 Variable Indirect materials SR3.50 SR 20,500 SR 25,100 Indirect labor 6.00 39,500 40,700 Factory supplies 1.00 7,600 8,200 Fixed Depreciation SR20,000 15,000 15,000 Supervision 25,000 23,000 26,000 Property taxes 10,000 12,000 12,000 Total costs SR117,600 SR127,000 26 0 Required (a) Prepare the responsibility reports for the Mixing Department for each month (1 mark). (b) Comment on the manager's performance in controlling costs during the two month period (1 mark).

Answer 1

SAR is an abbreviation for Saudi Riyal
July (6000 Direct Labor Hours)
Controllable cost	Variable cost per hour	Multiply: Labor hours	Flexible Budget
Indirect Material	SAR 3.50	6,000	SAR 21,000
Indirect Labor	SAR 6.00	6,000	SAR 36,000
Factory Supplies	SAR 1.00	6,000	SAR 6,000
August (7000 Direct Labor Hours)
Controllable cost	Variable cost per hour	Multiply: Labor hours	Flexible Budget
Indirect Material	SAR 3.50	7,000	SAR 24,500
Indirect Labor	SAR 6.00	7,000	SAR 42,000
Factory Supplies	SAR 1.00	7,000	SAR 7,000
	Budget	Actual - July	Actual - August
Supervisory Costs	SAR 25,000	SAR 23,000	SAR 26,000
Multiply: Controllable costs (%)	50%	50%	50%
Controllable Supervisory Costs	SAR 12,500	SAR 11,500	SAR 13,000
Depreciation and property taxes are non-controllable costs for the manager of the mixing department. Therefore, these costs are not included in the responsibility report.

Responsibility Report for July
Controllable cost	Budget	Actual	Difference	Indicate	Remarks
Indirect Material	SAR 21,000	SAR 20,500	SAR 500	Favorable	The actual cost is less than Budget cost
Indirect Labor	SAR 36,000	SAR 39,500	SAR 3,500	Unfavorable	The actual cost is more than Budget cost
Factory Supplies	SAR 6,000	SAR 7,600	SAR 1,600	Unfavorable	The actual cost is more than Budget cost
Supervisory Costs (Controllable)	SAR 12,500	SAR 11,500	SAR 1,000	Favorable	The actual cost is equal to Budget cost
Total	SAR 75,500	SAR 79,100	SAR 3,600	Unfavorable	The actual cost is more than Budget cost
Responsibility Report for August
Controllable cost	Budget	Actual	Difference	Indicate	Remarks
Indirect Material	SAR 24,500	SAR 25,100	SAR 600	Unfavorable	The actual cost is more than Budget cost
Indirect Labor	SAR 42,000	SAR 40,700	SAR 1,300	Favorable	The actual cost is less than Budget cost
Factory Supplies	SAR 7,000	SAR 8,200	SAR 1,200	Unfavorable	The actual cost is more than Budget cost
Supervisory Costs (Controllable)	SAR 12,500	SAR 13,000	SAR 500	Unfavorable	The actual cost is equal to Budget cost
Total	SAR 86,000	SAR 87,000	SAR 1,000	Unfavorable	The actual cost is more than Budget cost
Comment
As per the responsibility report, both months have unfavorable variance. This unfavorable variance indicates the manager's performance is worst. Thus, the manager's performance for controlling costs is worst during both months.